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Winning Deal

Mindtree put on a good show in the first half of the financial year. It now can sail through its FY15 guidance with little effort

Mindtree is a midcap IT company operating verticals like hi-tech, media, BFSI, retail and travel offering services of application development and maintenance, consulting, testing and infrastructure services. Over 60 per cent of its revenues comes from the US while 26 per cent comes in from Europe. Here are the factors that will drive Mindtree's revenues ahead:

Robust guidance. Though Mindtree does not provide revenue guidance, it hinted in its Q2 commentary that it was looking at growing faster than the industry growth pegged by NASSCOM at 13-15 per cent for FY15. According to ICICI Securities, Mindtree does not need to do much during the rest of the current financial to top its previous year performance. With first half of current year putting on a good show Mindtree can achieve 16 per cent (y-o-y) growth in FY15 even if the next two quarter revenues are flat sequentially.

Strong deal signings. Mindtree has been on a strong deal-signing spree for some time. It signed deals worth $165 million in Q2 - the same as it did in Q1. In the last 12 months, it has signed deals worth $650 million (FY14 revenues stood at $502 million).

Client-mining takes precedence. Mindtree expanded its focus from the top 10 clients to the top 30. This deeper client-mining seems to be paying off: revenue per active client jumped from $685.9k in Q1 to $735.2k in Q2. The company added eight new clients of which one is in the $30 million category, one in the $20 million category and one in the $5 million category.

Stable margins. Mindtree's margins stood at 20 per cent in FY14. It has manage to hold onto those margins during the first half of this financial on the back of revenue growth, operational efficiency and better pricing environment today. The company has guided Q3 margins to be flat (q-o-q basis) going ahead.

Risks. Attrition is a big headache - up from 12.7 per cent in FY14 to 15.7 per cent in Q2FY15. Slow growth in Europe is another concern.

Outlook and valuation. Mindtree has shown consistent performance in the last couple of quarters. Its efforts at client-mining appear to be showing results. Mindtree trades at 20 times its ttm earnings that is on the higher side of its historic valuations. However, it appears to have put its act together. Higher valuations could sustain. Buy.